These 3 ETFs Offer Solace In This Painful Bear Market

Assuming you have cash on hand and a time horizon of at least three years.

The poet Rainer Maria Rilke warned us not to waste times of difficulty:

How we squander our hours of pain. How we gaze beyond them into the bitter duration to see if they have an end. Though they are really our winter-enduring foliage, our dark evergreen, one season in our inner year--not only a season in time--but place and settlement, foundation and soil and home.

These bear market days are your hours of pain. To squander them would be a pity, but so many do by standing on the sidelines, paralyzed by fear and the dangerous idea that market bottoms can be precisely timed. No one can tell you when that moment will occur. Many will pretend. But they are doing just that: pretending. The short-term movement of markets is unknowable. Only a charlatan or a fool would pretend otherwise. In a casino the person who bets red on roulette and lands there is called lucky. On Wall Street, they're called a genius. Until they land on black the next time.

And yes, we're in a bear market. Make no mistake: we are in one despite the fact that the Dow is only down 15% from its peak, a bit shy of the 20% traditional definition of a bear market. Europe, Japan and Emerging Markets are already down over 25%, having crossed the technical bear threshold. We are likely to do so as well. But by the time a bear market is called a bear, it is often close to over. The post World War II period has seen 15 bear markets, most of which were declines in the 20%-27% range, and lasted an average of 330 days. Stocks peaked in May, so we are close to 10 months in.

Instead of trying to time the markets or predict their course, follow the path of the best investor ever, Warren Buffett, who buys not when he thinks he can discern a "bottom" (he has the humility to know he can't) but when he knows he can discern the only thing discernible: value. Value is defined by a good price relative to the underlying cash flows. As he likes to say: "I'd rather be approximately right than precisely wrong." So many pledge false fealty to the idea that you shouldn't buy a stock if you can't spot the exact bottom. By doing so, they miss the ultimate opportunity. They spend their time trying to predict the hopelessly unpredictable and infinite moving parts of a global economy, a futile effort given the variability (and feedback mechanisms) that make such prognostications inherently impossible. As John Kenneth Galbraith said: "The only function of economic forecasting is to make astrology look respectable." And this from an economist.

When calm, the mind can apprehend the possibilities. Some say the Chinese character for crisis is composed of two separate characters, that of danger and opportunity. The human mind, based as it is on primitive intuition, naturally runs away from fear, not towards it. But because most people intuit, successful investing demands the opposite: counterintuition. What most people do can never make you rich. To counterintuit, you must lean into fear: buy when stocks are falling well below their intrinsic value, knowing that such value will buoy the price eventually. As Buffett says, "You want to be greedy when others are fearful. You want to be fearful when others are greedy. It's that simple."

Today people are fearful and so few will be able to muster the resolve to forge greed in the crucible of a fearful mind.

Where to look?

Possibilities abound, not necessarily in U.S. stocks (which are only modestly undervalued) but in all the areas that have been forsaken by fear. Consider buying the following ETFs to convert crisis into opportunity, all trading at bargain-basement multiples to cash flow:

I own all of the above and expect each to deliver robust returns over the next 3-5 years. I did not buy a single one at the bottom, but I acquired all of them at prices well below what I deem to be fair value. That's what's important for eventual returns. I've been buying more of all three over the past few months and will continue to if prices drop further. As price drops, value only increases, as does the expected future return.

[Note: James Berman owns SCHE, SLX & VDE, both personally and in accounts for clients. This article is intended to provide general information and should not be considered legal, tax or financial advice. Consult an investment professional before investing. All investment involves risk of loss. No investment or claim is guaranteed. No one should invest in any financial security without reading the full prospectus and seeking professional, personalized advice, if required.]